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Mathematical model:
TC = Total Cost
F = Fixed cost
V = Variable unit cost
Q = Quantity produced
TC = F +VQ (1.4)
Decision model - a logical or mathematical
representation of a problem or business situation that
can be used to understand, analyze, or facilitate making
a decision.
Inputs:
◦ Data, which are assumed to be constant for purposes of the
model.
◦ Uncontrollable variables, which are quantities that can change but
cannot be directly controlled by the decision maker.
◦ Decision variables, which are controllable and can be selected at
the discretion of the decision maker.
TC(manufacturing) = $50,000 + $125*Q
TC(outsourcing) = $175*Q
Breakeven Point: TC(manufacturing) = TC(outsourcing)
General Formula
F + VQ = CQ
Q = F/(C - V) (1.5)
In the grocery industry, managers typically need to know
how best to use pricing, coupons and advertising
strategies to influence sales. Grocers often study the
relationship of sales volume to these strategies by
conducting controlled experiments to identify the
relationship between them and sales volumes. That is,
they implement different combinations of pricing, coupons,
and advertising, observe the sales that result, and use
analytics to develop a predictive model of sales as a
function of these decision strategies.
Sales = 500 – 0.05(price) + 30(coupons) + 0.08(advertising) +
0.25(price)(advertising)